Policy Contribution Issue n˚14 | June 2020 Six years after Ukraine’s Euromaidan: reforms and challenges ahead Marek Dabrowski, Marta Domínguez-Jiménez and Georg Zachmann Executive summary Marek dabrowski Since the EuromaidAN protests (2013-2014), Ukraine has had two presidents and four (marek.dabrowski@bruegel. governments. They have initiated various reforms in the economic, institutional and political org) is a Non-Resident spheres, with the aim of bringing the country closer to the European Union, boosting eco- Fellow at Bruegel nomic growth and international competitiveness, and building a liberal democracy. Reforms have been implemented in a difficult environment of external aggression, which marta domínguez- has led to human and material losses and has caused loss of control over part of the country’s Jiménez (marta. territory. However, resistance to aggression and fresh memories of the kleptocratic regime [email protected]) of the former president Viktor Yanukovych (2010-2014) have helped to unite society and is a Research Assistant at Ukraine’s political forces in favour of the reform programme. Bruegel Although many important policy and systemic changes have been implemented, the reform agenda remains unfinished. It must be continued despite the dramatic new challenges Georg Zachmann (georg. related to the COVID-19 pandemic. [email protected]) is a Senior Fellow at Bruegel International financial support and especially International Monetary Fund con- ditionality have been instrumental in pushing the Ukrainian authorities to carry out major reforms (including of banking law, the gas sector and land ownership). This was done despite The authors thank these reforms being opposed by old elites, or running counter to populist instincts (such as Dmytro Boyarchuk, Maria gas price reform and pension reform). The dominant role of old elites still holds back home- Demertzis, Sergei Guriev, grown reform, leading to reformers having an unhealthy reliance on outside pressure. Christopher Hartwell, Oleh Havrylyshyn, Andre Sapir, Nicolas Veron and Recommended citation Hlib Vyshlinsky for their Dabrowski, M., M. Domínguez-Jiménez and G. Zachmann (2020) ‘Six years after Ukraine’s comments. Euromaidan: reforms and challenges ahead’, Policy Contribution 2020/14, Bruegel 1 Introduction The Euromaidan protest movement in Ukraine and the fall of the government of former Presi- dent Viktor Yanukovych in February 2014 marked a turning point in contemporary Ukrainian history. It signified a shift towards a clear west-facing orientation of politics and the economy. Although it provoked Russian intervention, the annexation of Crimea and war in Donbas (which is ongoing despite numerous ceasefires), it also opened a new window of political opportunity for reforming the Ukrainian state and economy. Given the heavy price Ukraine has paid for the Euromaidan, in terms of loss of control over part of its territory, human and material losses, and continued security threats, one might legitimately ask whether Ukraine has made fundamental progress in building an internationally competitive market economy and liberal democracy. We answer this question by assessing economic and institutional developments in Ukraine between November 2013 (the beginning of Euromaidan) and early 2020. Our analysis does not cover the COVID-19 pandemic, which will likely become a main determinant of the economic and social situation in Ukraine in 2020 and beyond. Our analysis starts from an overview of the major external and internal political develop- ments (section 2), followed by an analysis of the macroeconomic and fiscal situation (section 3), the situation of the financial sector (section 4), and changes in the geographic origin and destination of Ukrainian trade (section 5). Section 6 discusses reforms in the energy sector. Section 7 deals with privatisation of state-owned enterprises (SOEs), the agricultural land market, business climate and anti-corruption measures. As many aspects of economic reform depend on political governance, we also analyse changes in this sphere (section 8). Section 9 discusses the role of external aid. Section 10 lists outstanding reform challenges to be addressed. 2 Major political and geopolitical developments since the end of 2013 Mass protests against the corrupt, kleptocratic regime of President Viktor Yanukovych began on 21 November 2013 on the Maidan Nezalezhnosti (Independence Square), the central square in the Ukrainian capital Kyiv. The protest was triggered by Yanukovych’s last-minute refusal, under Russian pressure, to sign the Association Agreement with the European Union. ‘Euromaidan’1 became the name of the protest movement, alternatively called the Revolution of Dignity. In February 2014, the Yanukovych administration’s use of force against the protest movement led to violence and deaths, and eventually to regime collapse. Yanukovych fled Ukraine and received asylum in Russia. In March 2014, Russia annexed Crimea, without meaningful resistance from the Ukrainian army. In April 2014, Russian support for a separatist movement in Donbas quickly esca- lated into a full-scale military confrontation. The most dramatic phase of the conflict was stopped by the Minsk II agreement on 12 February 2015 (with the mediating role of France and Germany). Since then, the conflict has entered state of partial suspension, with ongo- ing exchanges of fire across the ceasefire lines. There is no perspective of resolution soon. 1 Nine years earlier, in the autumn 2004, a similar mass protest against the falsification of the presidential election (which gave victory to Viktor Yanukovych) took place in the same square. The protest was known as ‘Maidan’ and led to the so-called Orange Revolution (see Karatnycky, 2005) and a re-run of the second round of the presidential election, which eventually saw Viktor Yushchenko elected. 2 Policy Contribution | Issue n˚14 | June 2020 As a result, Ukraine has lost control of approximately half of two highly industrialised and export-oriented regions – Donetsk and Luhansk oblasts. The conflict with Russia has destabilised the Ukrainian state and caused substantial economic burdens: loss of the productive capacity of the occupied territories, war damages, human suffering, large numbers of displaced people, higher military and security spending, Russian trade sanctions (see section 4) and a sharp decline in business confidence, especially on the part of foreign investors. On the other hand, the external threat to the country’s territo- rial integrity and independence has helped to unite Ukrainian society and build support for the reform process, especially in the years 2014 to 2016. Meanwhile, on the domestic political front, the May 2014 presidential election gave victory to Petro Poroshenko, and October 2014 parliamentary elections brought to the fore a coalition of reform-minded political parties. There were two prime ministers during Poroshenko’s pres- idential term: Arseniy Yatsenyuk (2014-2016) and Volodymyr Groysman (2016-2019). Volodymyr Zelensky succeeded Poroshenko as president in May 2019. His party Servant of the People won an absolute majority in the July 2019 parliamentary election and formed the Cabinet of Ministers headed by Prime Minister Oleksiy Honcharuk. On the initiative of President Zelensky this government was replaced by another headed by Denys Shmyhal in early March 2020 (see section 8). 3 Macroeconomic situation and public finances The political events of early 2014 and the conflict with Russia had a strong negative impact on the Ukrainian economy. The pre-Euromaidan stagnation of 2012-2013 was followed by a deep output decline: -6.6 percent in 2014 and -9.8 percent in 2015 (Table 1). This was accompanied by a balance-of-payments, banking and fiscal crisis. The gross international reserves of the National Bank of Ukraine plummeted to a level below $5 billion in February 2015 (Figure 1). The hryvna (UAH) depreciated from 8 UAH/$ in January 2014 to 30 UAH/$ on 26 February 2015 (Figure 2). As result, end-of-year inflation jumped to 24.9 percent in 2014 and 43.3 per- cent in 2015 (Table 1). The collapse in the hryvna’s exchange rate, high inflation and output decline also meant a negative shock to commercial banks, many of which were already in a fragile position well before the 2014-2015 crisis. Fiscal accounts deteriorated and general government (GG) gross public debt to GDP more than doubled between 2012 and 2015, reaching around 80 percent of GDP in 2015-2016 (Figure 3), despite partial debt reduction negotiated with private creditors. Ukraine lost access to financial markets and became totally dependent on the International Monetary Fund and other external assistance. Table 1: Ukraine: basic macroeconomic indicators, 2012-2019 Indicator 2012 2013 2014 2015 2016 2017 2018 2019 GDP, constant prices, annual % change 0.2 0.0 -6.6 -9.8 2.4 2.5 3.3 3.2 Inflation, end-of-period consumer prices, annual % change -0.2 0.5 24.9 43.3 12.4 13.7 9.8 4.1 Unemployment rate, % of total labour force 7.5 7.2 9.3 9.1 9.5 9.7 9.0 8.5 General government net lending/borrowing, % of GDP -4.3 -4.8 -4.5 -1.2 -2.2 -2.2 -2.2 -2.0 Current account balance, % of GDP -8.1 -9.2 -3.9 1.7 -1.5 -2.2 -3.3 -0.7 Source: IMF World Economic Outlook database, April 2020. Note: Except for inflation other figures for 2019 are IMF staff estimates. 3 Policy Contribution | Issue n˚14 | June 2020 4 foreign currency for international transactions other than those related to trade. trade. to those related otherthan transactions currency forinternational foreign limitsonavailable maximum including inforce, remain restrictions account some current that be noted, should however, 36).It p. 2019a, in2018(IMF, 50percent over by rose which percent in the last quarter of 2018 and first quarter of 2019, to counteract the continuous infla continuous the quarter quarter counteract the last and first to in of 2018 2019, of percent 18 reaching points, of550basis atotal by steps insix thenincreased was It 12.5percent.